Retails investors can give themselves a pat on their back as they are outperforming most fund managers in the COVID-19 rebound!

The S&P/ASX 200 Index (Index:^AXJO) made a stellar 32% bounce since the bear market trough 11 weeks ago and most of the gains were reaped by everyday investors.

It’s the so-called “smart money” that have been playing catch-up as they were bracing for a second sell-off that never came.

Right warning, wrong timing

Remember back in early May when ASIC issued an usual warning to mum and dad investors? The market regulator was alarmed to see a spike in new and dormant trading accounts springing up and cautioned them about the likelihood of losing money.

“Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge,” said ASIC.

“For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.”

Lion’s share of the gains

This is very sound advice and there may be some retail investors who have lost big during the market turmoil.

But there’s little doubt it’s retail investors that have been backing the V-shape recovery in our market while fund managers sat on their hands.

I don’t have the data to prove this, but there is enough anecdotal evidence to suggest this is true – and it isn’t only happening here.

US retail investors are laughing too

Retail investors in the US have also been jumping head first into the market. Bloomberg reported that retail brokerages, including Charles Schwab Corp. and TD Ameritrade Holding Corp., posted record account sign-ups and trading volume.

All this while the S&P 500 was surging over 40% from its bear market bottom in on March 23.

Call it dumb luck, but retail investors here and in the US couldn’t have timed their entry any better!

Buying the bottoms and selling the tops

I have been actively buying the market since speculating at the end of March that we may have seen the worst of the sell-off.

But the purpose of this article isn’t self-congratulatory. There are a few important takeaways from this experience.

For one, ASIC is right to warn investors not to try to time the market – and this probably applies to fund managers too.

The right strategy for those with a longer investment horizon is to stay invested in the market and to buy when you believe there is value, as opposed to worrying about whether there’s another shoe that will drop.

No one can consistently buy the bottom and sell the tops. Making this your ultimate goal will drive you crazy.

Should you be day trading?

Unless you know what you are doing, trading in and out of the market will often leave you nursing losses as over 80% of short-term and day traders get wiped out in the first two years of starting.

For those first timers who are lucky enough to make a killing in this new bull market, they should get educated about the market quick. Pay to attend courses and read up on managing risks. Avoid the free seminars as there’s usually a reason why they are free.

Most of all, don’t over extend yourself. You know you are in this camp if you can’t pay your bills or feed yourself if the market suddenly turns.

Tips for dips

Finally, don’t be afraid to buy the dips. The fact that many fund managers have been slow to buy into this new bull market means there’s a lot of cash sitting on the sidelines waiting for opportunities.

This doesn’t mean we won’t get a market correction of up to 10%, but after such a big jump, we are very unlikely to be retesting our March 23 lows.

More reading

• Top brokers name 3 ASX 200 shares to sell next week
• Top brokers name 3 ASX 200 shares to buy next week
• Why dividend shares aren’t quite as good as you’d think
• Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?
• Invest like Warren Buffett with these ASX 200 shares

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Follow me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post How mum and dad investors are beating fund managers at their own game appeared first on Motley Fool Australia.

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I think it’s fairly safe to say that most ASX investors love a good dividend share, particularly those that offer franking credits. The unique way our tax system is structured makes it very attractive for ASX shares to pay dividends to investors. Over time, this has led to most ASX companies adopting a dividend payout policy, even if they’re still very much in their ‘growth phase’.

We can see this reflected in the yields that an S&P/ASX 200 Index (ASX: XJO) fund provides. Let’s take the iShares Core S&P/ASX 200 ETF (ASX: IOZ). It has a trailing yield of 4.51% on current prices, which also comes with some franking credits.

By comparison, a US-based index fund like the iShares S&P 500 ETF (ASX: IVV) currently offers a trailing dividend yield of just 1.94%, with no franking credits in tow.

No brainer, right?

Well, maybe.

What’s wrong with ASX dividend shares?

Dividends are great – I love them myself. But perhaps dividend income isn’t quite as good as it initially seems.

Let’s look at 2 hypothetical companies.

Company A and Company B both make $1 in earnings per share. That’s $1 a shareholder of both Company A and Company B is entitled to as a part owner.

But let’s say both companies can achieve an internal Return on Invested Capital (ROIC) of 15%.

If company A retains its earnings and reinvests that $1 back into the company, it should be able to provide $1.15 of earnings per share in the following year. Since it is reinvesting this money, it’s not subject to corporate taxes. As such, shareholders of Company A get the benefit of an untaxed profit of 15 cents per share that is now compounding and working to create even more wealth in the future.

The real cost of a dividend

By Contrast, Company B instead pays out half of its earnings as a dividend of 50 cents per share. It then reinvests the remaining 50 cents per share back into the business. Thus, Company B owners are getting 50 cents per share in dividend income and can expect 57.5 cents in earnings per share the following year.

But given that 50 cents per share is being paid out of profits, this money must first be subjected to corporate tax. Afterward, the dividends will come with a receipt that tax has been paid, commonly known as a franking credit. This franking credit enables the dividend not to be taxed again as income when received by its shareholders.

But it is still taxed money, even if only taxed once. The point here is that Company A shareholders can expect  $1.15 in earnings the following year, on which no tax is payable. Company B shareholders can expect $1.075 in earnings the following year, half of which will be taxed.

Over time, this gap in earnings power will widen, making one group of shareholders a lot wealthier than the other. And all because Company B is paying out half its profits while Company A is reinvesting them.

Sure, Company B shareholders are getting some income on the side, but this income is coming at a cost. Unless you can reinvest your dividends for a return greater than 15% per annum, you’re losing out.

Foolish takeaway

Everything comes at a price, and dividend income is no different. So if you’re swooning over how great dividend shares are, have a think about what your company might be giving up to fund paying you these dividends. Or find companies that can manage both growth and funding a dividend.

More reading

• Top brokers name 3 ASX 200 shares to sell next week
• Top brokers name 3 ASX 200 shares to buy next week
• How mum and dad investors are beating fund managers at their own game
• Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?
• Invest like Warren Buffett with these ASX 200 shares

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why dividend shares aren’t quite as good as you’d think appeared first on Motley Fool Australia.

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Do you want to replace your entire wage with dividends? It’s definitely possible to do it with ASX dividend shares.

I think having excess cash in the bank making interest at less than 1% just seems like a missed opportunity.

Before the coronavirus, wage growth was low and switching jobs seemed like the only way to get a good wage increase. These days ASX dividend shares may be the best way to boost your income.

The type of ASX shares that you could be looking at depends on how much dividend income you’re trying to make and how quickly.

You need to replace your wage fairly soon

You could be at a stage in life where retirement is coming up soon. Perhaps you are in a physical job and you won’t be able to do that for much longer. If this kind of situation describes you then high dividend yields could be the answer. But whatever you pick still needs to have a bit of potential growth too.

If you’re at retirement age and you aren’t rolling in money, you could be eligible for the pension or part pension which could help supplement your income needs.

Maybe you have $100,000 or $200,000 to invest to boost your income. The overall ASX share market is not a bad option for dividends, with a long-term investment in Vanguard Australian Shares Index ETF (ASX: VAS). The UK share market also has a solid dividend yield, which we can access through Betashares FTSE 100 ETF (ASX: F100)

There are also some listed investment companies (LICs) with big dividend yields like WAM Research Limited (ASX: WAX) and Naos Emerging Opportunities Company Ltd (ASX: NCC). Both of these LICs have grossed-up dividend yields of more than 9% and have paid reliable dividends over the past several years. They both look at smaller shares which have more growth potential than blue chips. A $100,000 portfolio with a 9% dividend yield makes $9,000 a year before accounting for income tax.

You have longer to replace your wage

You may not have an urgent need to build your income. In that case it’s probably better to go for ASX dividend shares that have good yields but are still generating growth over the long-term.

ASX blue chips like Wesfarmers Ltd (ASX: WES) and Macquarie Group Ltd (ASX: MQG) have been two good options that combine dividends and growth. Real estate investment trusts (REITs) like Rural Funds Group (ASX: RFF) are also solid income options. Infrastructure shares such as APA Group (ASX: APA) can also be reliable dividend payers.

However, some of the best ASX dividend shares could be ideas that have a solid starting yield, keep growing their dividend and can make capital gains over the long-term.

I’m thinking about shares like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Magellan Global Trust (ASX: MGG), WAM Microcap Limited (ASX: WMI), Future Generation Investment Company Ltd (ASX: FGX) and Brickworks Limited (ASX: BKW).

Foolish takeaway

I’m aiming to replace my work earnings with dividends over time with many of the businesses I’ve named above. The younger you are the easier it is to plan ahead for your portfolio and benefit from compound interest. It just takes time. Plan ahead to replace your earnings. I think a monthly investment plan is a good routine. Eventually you’ll reach excellent wealth and dividends.

More reading

• Is this ASX small cap the best placed to benefit from the $700m HomeBuilder grant?
• 3 ASX dividend shares for retirees
• 3 ASX shares for a beginner’s portfolio
• Are Macquarie Group shares worth investing part of $3,000 into this June?
• ETFs I’d pick to build a passive portfolio

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO, MAGLOBTRST UNITS, RURALFUNDS STAPLED, WAM MICRO FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks, Macquarie Group Limited, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of APA Group and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post How to replace your entire wage with dividends appeared first on Motley Fool Australia.

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